Buffett bets $44B on freight recovery

For those looking for a sign the economy is finally turning around, it has come in the form of Warren Buffett. The billionaire owner of Berkshire Hathaway is banking on an economic turnaround with the purchase of Burlington Northern Santa Fe Corp. (BNSF) in a deal valued at $44 billion, making it the largest single acquisition in Berkshire Hathaway’s existence

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For those looking for a sign the economy is finally turning around, it has come in the form of Warren Buffett. The billionaire owner of Berkshire Hathaway is banking on an economic turnaround with the purchase of Burlington Northern Santa Fe Corp. (BNSF) in a deal valued at $44 billion, making it the largest single acquisition in Berkshire Hathaway’s existence. His confidence in a resurgent freight market should also cheer truck fleets waiting for that turnaround.

Under terms of the agreement, Berkshire Hathaway, which owns 22.6% of BNSF now, will take 100% ownership of the corporation. The deal, for $34 billion in stock and the assumption of $10 billion in debt, requires two-thirds passage by the remaining BNSF shareholders and must receive Dept. of Justice approval.

“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Buffett, chairman & CEO. “Conversely, America must grow and prosper for railroads to do well. Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry. Most important of all, however, it’s an all-in wager on the economic future of the United States.

“I love these bets,” Buffett added.

The transaction is expected to be completed during the first quarter of 2010, Berkshire said.

Eric Starks, president of FTR Associates, said the move was not a big surprise.

“He’s been looking at transportation for awhile,” Starks told Fleet Owner, adding that Buffett is really just a shrewd investor. “It’s not like there is a lot of freight sitting on the sidelines that he sees. He’s in it for the long haul. You want to buy when you’re at the bottom and this is as close to the bottom as you can go.”

The American Trucking Assns. (ATA) most recent for-hire tonnage report showed a 0.3% decline in September after consecutive months of improvement. Despite that, ATA’s chief economist Bob Costello told Fleet Owner last week the industry is heading in the right direction.

“The industry should be prepared for ups and downs in the months ahead, but the general trend should be modest improvement,” said Costello. “Between most economic indicators recovering and less of an overhang in inventories, I’m confident that the industry is still on the road to recovery.”

While the emergence of Buffett may bolster some, Lee Klaskow, a senior research analyst covering transportation and logistics at Longbow Research told Fleet Owner that the deal is viewed as just another merger.

“We don’t really see any fundamental changes within the industry because of the purchase, we really see it as just a change of ownership,” Klaskow said. “Mergers happen all the time.”

Klaskow said the news of the acquisition has buoyed transportation stocks, with the Dow transports rising 4.1% in morning trading. Burlington Northern jumped 28%.

“We are thrilled to have the opportunity to become a part of the Berkshire Hathaway family,” said Rose, BNSF chairman, president & CEO. “We admire Warren’s leadership philosophy supporting long-term investment that will allow BNSF to focus on future needs of our railroad, our customers and the U.S. transportation infrastructure. This transaction offers compelling value to our shareholders and is in the best interests of all of our constituents including our customers and employees.”

Klaskow said one benefit may be the ability of BNSF’s earnings reports to get “lost” in the Berkshire Hathaway empire. That might allow BNSF to focus more on the long term rather than feel the need to satisfy short-term investors, he said.

The railway will continue to be based in Fort Worth, TX. All assets and subsidiaries of BNSF are included in the deal.

Klaskow said that Buffett’s investment in Burlington Northern has been increasing for several years.

“There’s the perception of Warren Buffett, that he’s got the golden touch,” Klaskow said. “The rails in the long term are a good investment because they are … extremely important for the economic growth.”